The US has intensified its war on terrorism on the financial front, targeting an ancient, informal system of money transfers that officials believe funnelled millions of dollars to Osama Bin Laden's al-Qaeda network.

The system is known as hawala, and it has been used for hundreds of years to move money across distances and around legal and financial barriers in South Asia and the Middle East.

Billions of dollars flow through the informal hawala system

Arab traders used it on the Silk Road to avoid being robbed, and now millions of Pakistanis, Indians and others working abroad use the hawala system to send money home to their families.

Billions of dollars flow through this informal and anonymous system, and officials believe that al-Qaeda is using the system to move money to its operatives around the world.

Difficult to trace

Typically, a transaction begins with a visit to a hawala broker.

The person wanting to send money gives the broker the sum of money to be transferred plus a fee and the name and location of the person he wants the money delivered to.

The use of hawala networks by terrorist organisations is easy and could pass unnoticed in the large bulk of 'legitimate' transactions undertaken by expatriate South Asians

Sunil Dasgupta

The broker then gives his customer a receipt. The receipts are usually nothing elaborate, often just a bit of paper.

The broker then contacts a broker in the recipient's country. The recipient contacts the local hawala broker.

While the system may be ancient, hawala brokers routinely use fax machines or the internet to communicate with other brokers.

The broker is given a code. It could be anything. It could be a string of numbers, or it could be a $5 bill with a specific serial number sent to him by his relative.

Records are kept only until the transaction is completed. Then they are destroyed.

The money does not move, either physically or electronically. Brokers dole out money from the same pool that they take it in. They make money from the fees they charge for the transactions.

The system is built on the trust between brokers, a trust built up between generations of hawala brokers.

Modern roots

While the hawala system may have ancient roots, much of the present hawala network grew out of gold smuggling operations in South Asia in the 1960s and 1970s, says Sunil Dasgupta, a foreign policy researcher with the Brookings Institution in Washington.

Hawala brokers routinely use fax machines or the internet

To get around gold import restrictions, smugglers used boats to ship gold from Dubai and Abu Dhabi to South Asia.

After selling the gold, they then needed to get the cash back home.

The smugglers discovered a solution in the growing population of Indians and Pakistanis working in the Gulf states.

These workers often sent money back home to their families, but if they went through official banking channels it cost more than the hawala system set up by the smugglers.

They could offer better rates because of the profits they were making on smuggled gold.

They developed an efficient system for moving money from expatriates in the Middle East, South-East Asia, the UK and even in North America to families in Pakistan and India, Mr Dasgupta said.

"The use of hawala networks by terrorist organisations is easy and could pass unnoticed in the large bulk of 'legitimate' transactions undertaken by expatriate South Asians," he said.